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Costly and dangerous: industry slams product rules

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The general insurance industry has expressed “deep concern” over new legislation designed to ensure the right financial products are sold to the right people.

A Senate inquiry is under way into provisions of the Treasury Laws Amendment (Design and Distribution Obligations and Product Intervention Powers) Bill 2018.

The legislation aims to force financial services companies to identify clear target markets for products and appropriate distribution channels, and would allow regulators to intervene at an early stage if consumer harm is detected.

Consumer groups believe this will prevent scandals such as the inappropriate sale of add-on insurance through car dealerships.

But in submissions published today, the Insurance Council of Australia (ICA) and National Insurance Brokers Association (NIBA) outline fears over the impact on general insurance.

“The Insurance Council and its members are deeply concerned the obligations, as currently drafted in the Bill, will hinder rather than improve the likelihood that consumers buy insurance suitable for their needs,” ICA says.

ICA says the Bill’s provisions have not been designed “to mesh easily with the unique characteristics of general insurance products”. It also warns the distribution obligations may mean insurers have to collect underwriting information again at renewal.

“This would fundamentally change the way insurance policies are regulated under the [Insurance Contracts Act] and require extensive systems changes at substantial cost to the industry.

“A large member has estimated the cost of overhauling its renewal processes to require the re-collection of information will [be] $62 million annually. This is on top of the one-off systems changes of approximately $14 million.”

This would result in higher premiums, ICA warns.

NIBA’s submission expresses concern at the Bill’s proposed target market determinations, and the impact they could have on brokers.

“We are very concerned that a consumer who might see themselves as falling within a target market might conclude the product is suitable and appropriate for their individual needs,” NIBA says.

“We believe this is very dangerous and potentially very misleading in the hands of consumers.

“Only those providing personal advice such as insurance brokers can advise on whether the product meets the consumer’s individual needs and objectives.

“To suggest insurers and their agents are doing more in the target market determination by reason of this Bill may unintentionally reduce the number of consumers seeking personal advice and the protection that comes with it.

“This is not a good result for the community.”

NIBA says insurance should not be included in the Bill until further consultation is carried out in light of the Hayne royal commission and other reviews.

“If this reasonable approach is not accepted, then urgent discussion is needed to fix what are significant flaws in the proposed Bill,” it says.

A submission endorsed by several consumer organisations, including Choice, the Consumer Action Law Centre and the Financial Rights Legal Centre, “strongly supports” the reforms.

“We believe [the reforms] would significantly improve consumer outcomes and improve trust and confidence in the financial system,” the submission says.

“The design and distribution obligations should help to achieve a cultural shift within financial companies away from simply ‘selling’ financial products towards designing and distributing suitable products that meet customer needs.

“Further, equipping the Australian Securities and Investments Commission with product intervention powers would allow the regulator to intervene before consumer harm occurs and deter misconduct by financial firms.”

Consumer Action Law Centre Senior Policy Officer Susan Quinn told consumer groups believe the legislation should go even further.

“We would ask that insurers are required to define who the target market is not, as well as who it is,” she says.

“Most of the problems have been around selling products to those who do not understand them or who cannot claim on them.”